Bombardier Deal with VistaJet Makes Aviation History

Order worth as much as $7.8 billion

Thomas Flohr may deserve the hefty discounts he undoubtedly got from Bombardier Inc. for placing the biggest order in business aviation history, a firm 56-plane order worth $3.1 billion at list prices — before discounts. With options, the deal could reach $7.8 billion for 142 Global aircraft.

Flohr — the golden-tressed founder and chairman of Swiss luxury private charter firm VistaJet, which flies an all-Bombardier fleet — did for Bombardier what nothing or no one else was able to do for quite some time: light a fire under the company’s stock. Shares jumped 8 per cent on the day to $3.37 — still significantly below the high of $4.87 reached earlier this year.

And discount or not, the deal is good news for Toronto and Montreal, where the aircraft are assembled and their interiors finished.

The VistaJet order lengthens the backlog for Bombardier’s Global to 38 months, said Danielle Boudreau, spokesperson for Bombardier Business Aircraft. That’s substantially above Bombardier’s own target of 24 to 30 months, and means production work in the two cities for more than three years based only on current orders.

Steve Ridolfi, president of Bombardier Business Aircraft, called the order “historic for Bombardier … by any standard.”

VistaJet operates high-end charter flights, largely in developing nations Flohr called “frontier countries.” Global business traffic is shifting fundamentally away from the traditional U.S.-Europe axis to so-called BRIC countries — Brazil, Russia, India and China, but not confined to those nations, Flohr said in a telephone interview as he sat in one of his planes at a London airport.

VistaJet does a lot of business in Russia, but is also active in Africa, principally Ghana and Nigeria, which has a lot of oil and gas firms. The company has pioneered luxury charter in far-flung places like Ulan Bator, Kazakhstan, Siberia and Africa, where industry traffic is growing faster than in richer, more mature markets.

“A lot of these countries, as we see, are trading directly with each other — some pharmaceutical company in Russia and some oil company in East Africa sell to the Chinese, and that requires that decision-makers travel directly to these regions.

“These are mega-trends and we don’t think they are reversible.”

But in what he conceded was something of a departure for VistaJet, he is embarking on a tour in New York Wednesday to drum up business in the U.S.

“We have very regular flights to the U.S. (coasts) and since we already have that traffic, we would offer our product to people living in the U.S. for international traffic. This is a slight change in direction” from underdeveloped markets.

“The wake-up call to me in 2012 was that since we’ve been so successful in Africa and Asia, I’ve had a fair number of Fortune 500 companies come to me and say, ‘Thomas, we do have (planes) but can you give us some help when our executives need to go to some (less accessible cities) in Africa or Siberia or China?’

“We’re growing at a rate of 25 per cent a year, so compounded, we’re doubling every three years,” Flohr said of his 7-year-old company, which sells blocks of time on an aircraft, generally in 100-hour segments.

“We worked on this deal for the last 18 months with Bombardier — it was quite a marathon.”

He admitted to receiving “preferential treatment” from Bombardier, his exclusive supplier, but he called the financial terms of the contract “highly confidential.”

VistaJet has recently received its 50th aircraft from Bombardier since 2005 — the charter firm sells all its planes back to Bombardier after 2½ years to keep its fleet rejuvenated.

“It was tough bargaining, but I think it’s great news for both companies,” said Flohr.

Alasdair Whyte, an analyst and editor at London-based Corporate Jet Investor, said that “VistaJet goes against the rules of what many charter operators say is the only model that works. It owns its own aircraft and it brands them strongly. But being a branded charter company appears to be working for VistaJet, and Bombardier knows them really well and are clearly comfortable with their model.

“Although it is buying business jets, it is really a new type of airline — and it (has) stronger credit than most airlines, although admittedly that it is not saying much.”

Analyst Brian Foley of Brian Foley Associates said: “It’s certainly good news for Bombardier, and VistaJet does seem to have a workable model.

“But this is almost an airline-type order, so I suspect that as with NetJets (see chart) and airlines, they can change delivery dates if there is a repeat of the 2008-2009 crisis,” which hit business aircraft hard.

Walter Spracklin, an analyst with RBC Dominion Securities Inc., wrote in a note to clients that “the huge order from VistaJet establishes the Global as the predominant large-cabin ultra-range business aircraft.”

“Bombardier has clearly done a nice job in developing the Global line, which offers a range of options and compares well against competitors with regards to cabin volume and range — two key characteristics for potential buyers.”

He expects production rates in Toronto and Montreal “to go higher,” but Boudreau, speaking from London, declined to comment on that.

A higher assembly rate will boost productivity on what is already Bombardier’s most profitable plane, said Spracklin, adding that profit margins would remain “healthy” despite discounts.

“The order goes a long way as well in terms of shoring up BBD’s underlying business jet segment” with higher revenues and margins and cash flow.

“While this wasn’t the CSeries order that we believe would be most impactful … we believe this order will be well received.”

For a video showing an inside look at the VistaJet business model and its founder, visit bit.ly/TsJLIK

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